WAYNE O'LEARY

Whose Economy Is It, Anyhow?

There are a few things they don't teach you in Economics 101. The
first is that there are different classes and groups in America whose
economic interests vary widely and are often in direct conflict.
Simply put, we are not all exactly in the same boat, and policies
that help A do not necessarily benefit B.

For starters, take the matter of deficits. A generation of
orthodox classical economists and conservative political theorists
have condemned deficit spending as the Devil's own work. Mainstream
politicians, including those in the formerly Keynesian Democratic
party, have been drawn along, accepting the conventional wisdom that
deficits are evil.

Deficit spending, however, can be a positive good; in times of
limited tax revenue, it permits government to make needed social and
infrastructure investments, spur a lagging economy (not presently a
problem), and redistribute income downward through public employment
to those not sharing in prosperity. Traditionally, deficit spending
is applied in recessionary times, but it is useful even in boom times
like the present.

For example, universal health coverage is something Americans are
told they can't have, because it would "bust the budget" and use up
the future surplus. Put aside, for the moment, consideration of a
modest tax increase, one common-sense way to finance such a program.
If small, periodic deficits were permitted, which they presently are
not in the political straitjacket of the 1997 budget agreement,
national health insurance would be perfectly feasible, even in the
absence of a tax hike. Occasional surplus shortfalls, or
unanticipated cost overruns inevitable in any comprehensive
initiative of this sort, could be accommodated without calamitous
effects. After all, as innumerable economists have pointed out over
the years, we owe our public debt (except for the 15 percent held by
foreign banks) basically to ourselves.

As it is, leaders like former Senator Bradley, who suggest
addressing the one-million-per-year increase in the number of
medically uninsured Americans, are accused of threatening the sacred
surplus, which has acquired a symbolic importance beyond logic.

Why, you might ask, are deficits so dangerous that we can never
run one? The truth is they aren't, unless and until they reach
staggering proportions and assume critical mass. Why, then, such
panic at the mere prospect of an unbalanced budget? One answer is
that deficits run by the government do have an admitted drawback:
They soak up, through federal borrowing, some of the money available
for private-sector credit, making business borrowing a bit more
difficult and marginally more expensive. Corporate America, always
with one eye on the bottom line, has an obvious vested interest in
resisting any suggestion of deficits that may indirectly cut into
profit margins, however slightly, despite the fact that they may be
used to improve the lot of ordinary citizens. It's not a question of
right and wrong, but of whose interest will be served.

There are other reasons for the anti-deficit fervor, of course.
Among them are business fears of any public expenditures that might
tend to enlarge government and enhance its regulatory role. Limiting
the size and scope of government is always high on the corporate
agenda, and a ban on deficits promises to shrink the public sector,
or to at least stunt its growth.

Not surprisingly, given the temper of the times, many politicians
who should know better share the prevailing bias in favor of
disappearing government. Vice President Gore is fond of pointing to
the fact that federal manpower rolls have been cut by 350,000 in the
last seven years and are now smaller than they've been since the
Kennedy administration, a positive outgrowth, he says, of his drive
to "reinvent' government. This assumes that government should
steadily shrink with the passage of time as Washington supposedly
does more with less, but that makes little sense. The U.S. population
has grown by almost 100 million since 1960, a 50 percent increase; if
government services and responsibilities are simply to keep pace with
population expansion, the federal presence has to expand accordingly
-- even at the cost of incurring an occasional deficit.

Although manageable deficits are mainly a threat to America's
corporate hegemony, there is another evil that must surely threaten
us all: the spectre of inflation. Inflation is what keeps Alan
Greenspan awake at night. He doesn't worry about unemployment; job
losses cause him only a momentary nocturnal twitch. But inflation is
his recurring nightmare, the horror of horrors that constantly
disturbs his blissful slumber. He fights against it even when it
isn't there. So, too, the people whom his Federal Reserve Board
represents: bankers, bondholders, and creditors in general.

The dirty little secret of American capitalism, however, is that
for ordinary people, a little inflation is actually a good thing. I'm
not speaking here of the type of hyper-inflation that threatened
Germany's Weimar Republic in the 1920s, or even the oil-shock
inflation visited upon the U.S. in the 1970s. Rather, I refer to the
sort of incremental, low-single-digit inflation that permits debtors
to pay back what they owe in slightly depreciated dollars.

For obvious reasons, bankers and other creditors despise this
relatively benign form of inflation; they make less in constant
dollars on their loans. Debtors living on the edge, conversely, are
often saved from the tyranny of high interest by a little gradual
inflation. The conflict inherent in these competing concerns has been
a constant refrain, off and on, throughout American history; it
helped form the basis for the political struggles of the late 19th
century that pitted farmers and workers against capitalists, "free
silver" against the gold standard, and cheap-money inflationists
against hard-money deflationists.

Especially beneficial to most people is the kind of slow,
imperceptible inflation caused when employees get modest pay hikes
that actually match or (Heaven help us) exceed the annual economic
growth rate. Large employers, in particular, dislike this type of
wage inflation, since their labor costs rise and their profits go
down -- unless they pass the raises along to consumers in the form of
unpopular price increases. To big business, in fact, rising wages are
the one true cause of inflation that must be guarded against; rising
prices don't really count.

Wage increases also disturb the stock market, which is why
business journalists invariably hail government reports showing that
average wages have not increased in the latest quarter -- or have
even gone down. Such happy "anti-inflationary" news always pleases
Wall Street and causes a jump in stock values based on enhanced
company profit margins. Deflationary price reductions for consumers
somehow don't have the same salutary effect.

The lesson here is that what is good for bankers, businessmen, and
investors is not always good for average Americans. This is true
regardless of the collective opinion of the mass media, which mostly
reflects one side in the silent debate, that of corporate ownership.
The question is, whose economy is it, anyhow?